Tax Planning For High Net Worth Individuals
by Hutch Ashoo and Chris Snyder · Updated February 4, 2023 · 7 min read ✦
Are you searching for tax planning for high net worth individuals? It’s no secret. High net worth individuals pay the most money in taxes, and this is unlikely to change anytime soon. However, because you pay the most, you also stand to save the most when you implement smart tax planning strategies to minimize your losses.
If you are a high net worth individual with over $5 million in liquid assets, click here to read our guide on wealth management that prioritizes tax minimization.
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At Pillar Wealth Management, we provide fiduciary advisory services to investors with $5 million to $500 million in liquid assets. We have over 60 years of experience in assisting high net worth clients and can get you the results you need. Click here to book a free consultation with us.
What follows are 10 ways to save money on your taxes. But some of these are time-limited (unless they get extended by the government), so don’t delay in figuring out which options make sense for you.
10 Strategies for High Net Worth Tax Planning
- Invest in Municipal Bonds
- Convert Your IRA or 401k to a Roth
- Contribute the Maximum to 529 Plans
- Contribute the Maximum to Your 401k
- Contribute the Maximum to Your Health Savings Account
- Adjust Your Real Estate Strategy
- Increase Your Giving
- Donate Items of Worth
- Start a Donor Advised Fund (DAF)
- Do You Have Access to High Net Worth Financial Advice?
1. Invest in Municipal Bonds
Though the growth of municipal bonds tends to be lower than equities over the long term, all the interest from municipal bonds is tax-free. Suppose you earn 3.5% from a municipal bond and 6% from an equity-based mutual fund. After taxes, these aren’t as far apart as they appear.
Plus, in a down year for equities, bonds work to stabilize your portfolio and should be part of any healthy asset allocation. So if you’re going to pursue an optimized asset allocation with bonds anyway, why not make municipal bonds part of the mix?
Some states also exempt municipal bond interest from taxation. If you live in one of those states, you save twice.
If you want to find a financial advisor who knows which securities to invest in to lower your tax payments, click here to read our exclusive guide.
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2. Convert Your IRA or 401k to a Roth
Roths have contribution limits, and high net worth households are generally excluded from using them. But because Roth investments grow tax free, the allure of getting your money into them should motivate you to be on the lookout for other ways to do it.
Rolling over your traditional IRA and 401k investments into a Roth might be your best option.
How and when you convert your traditional accounts to a Roth can get complex, so we’re not going to get into those details here. But the important thing is, start early. Why?
Because in the year that you do a rollover, you will pay taxes on the amounts your roll into your Roth. So the sooner you roll those funds in, the more years they’ll have to grow tax free. Some people like to annually rollover a portion of their investments into a Roth, keeping the taxes manageable each year.
But you can get really smart about this by pairing up your Roth conversions with other tax minimization strategies on this list. For instance, what if you do a big rollover the same year you install solar panels? You can use the sizable solar tax credit to offset the one-time tax bill from the rollover.
Get creative with the timing of this, and you can score some huge long term tax free growth, even as a high net worth household.
To learn more about which tax minimization strategies help high net worth individuals, order a free a hardcover copy of our book, 7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning – Strategies For Families Worth $25 Million To $500 Million.
3. Contribute the Maximum to 529 Plans
If you have kids, you can contribute to their 529 plans. These grow tax free and can be spent on qualified educational expenses. The new tax law expanded this to now include K-12 education at private and religious schools, not just college.
So you can contribute lots of money to 529s over the many years your kids will attend school. If you’re a grandparent, you can do the same thing for your grandkids.
You can give up to $15,000 per year, or $30,000 as a couple.
But note: These contributions are not deductible on your federal taxes, but they are in most states.
4. Contribute the Maximum to Your 401k
You’re allowed to contribute up to $18,500 per person, per year, plus a $6,000 annual catchup if you’re over 50.
All of this counts as a tax deduction, reducing your taxable income.
If you are a high net worth investor, then reducing your taxable income can also do wonders for your portfolio. Click here to read our guide on how to improve portfolio performance.
5. Contribute the Maximum to Your Health Savings Account
Noticing the trend here? The amounts you can contribute to all these aren’t huge. But do them all each year, and they add up to a more sizable number.
You can contribute $3450 per person or $6900 as a couple to your health savings account (HSA). If you’re 55 or older, you can increase that by $1000.
The great benefit of HSAs is that they also grow tax free, and then can be used for medical expenses at any point in time. You do not have to spend them or lose the money each year like a Flexible Spending Account.
Let’s pause for a minute, and add all these up.
If you contribute the maximum to your 401k, 529, and health savings account, here’s how much you can deduct from your taxes:
Individual over 50: $42,950
Couple over 50: $85,900
Those are tax deductible contributions at either the federal, state, or both levels. Each year. Take a look at your current gross income. How much does the combination of these three strategies reduce it by?
6. Adjust Your Real Estate Strategy
The recent tax law reduced the maximum mortgage value for which you can deduct payments down to $750,000. And, interest on other homes is no longer deductible at all.
For now then, the days of huge real estate tax write-offs are over. From a tax perspective, you should consider adjusting your real estate strategy to focus on profits and income, rather than on tax minimization. How that looks for everyone will be a little different.
If you need help finding a financial advisor that can help you figure this out, read the 1st chapter of the 7 secrets book for individuals having over $10 million in assets.
7. Increase Your Giving
The recent tax law raised the standard deduction up to $24,000 for couples. As a high net worth individual, you should have no trouble surpassing that. And you can claim tax deductions on donations of up to 60% of your adjusted gross income (and 30% of appreciated assets) to nonprofits.
By choosing to give to causes that matter to you, you’ll reduce the amount of your money the government gets to use for causes that matter to it. And you’ll reduce your tax burden as well.
8. Donate Items of Worth
You can donate much more than just money. You can give real estate, stock options, clothes, cars, airline miles, and other items of notable value that various nonprofits can use. You can even donate old wedding dresses for example. There are nonprofits that specialize in collecting and re-selling used wedding dresses.
The great thing about donating items is that you’re not touching your accounts, but you still get the tax benefits. So, finding things to donate that you probably wouldn’t have sold anyway is like getting a free tax deduction. It’s a terrific tax strategy for high net worth individuals.
9. Start a Donor Advised Fund (DAF)
Here, you set up your own fund that grows tax free, and contribute your own money to it. Then, over time, you give away this money to nonprofits of your choice. You can also bequeath this fund to your heirs so it continues funding causes you care about even after your death.
The great thing is, the year you contribute to your DAF is the year you get to claim the tax deduction. NOT when you actually give the money to charity.
Did you catch that?
For instance, suppose you set up a donor advised fund and seed it with $200,000. Then, over the next 15 years, it grows, and you give out $10k here, $20k there, and $5k over there to various charities.
In terms of taxes, you get to claim the entire $200,000 deduction in the year you donated it.
Do you realize how powerful that is? It offers you a similar opportunity as the solar tax credit (not quite as good because this is a deduction, not a credit, but you can give unlimited amounts to a DAF).
Here’s the opportunity: If you pair up a gift to a donor advised fund with something that has a large one-time tax bite (such as a Roth conversion), the deduction from the DAF gift can offset the conversion cost.
So again – get creative with the timing of these.
If you’re older, you can also pair this up with your required minimum distributions (RMDs). Contribute to a donor advised fund the same year you take a large distribution, and you can blunt the tax consequence that action normally would have triggered.
You have to make the amounts work out in your favor, and the math can get tricky. So you would be wise to enlist the help of a high net worth financial advisor so you can maximize your tax savings in the year or years you take these actions.
Remember, tax minimization is a critical part of cost control and achieving financial serenity. If you are a high net worth investor, you can’t just aim for a high performance. Instead, you need to make a series of changes that can help you pursue your financial goals. Click here if you need help to create a wealth management plan.
10. Do You Have Access to High Net Worth Financial Advice?
If you need help with your high net worth tax planning strategies, Pillar Wealth Management works exclusively with high and ultra high net worth households.
We have helped numerous high net worth households minimize their taxes using methods such as the ten you just read about.
If you’re a high net worth household and are ready to do whatever it takes to slash your tax bill, schedule a Wealth Management Analysis meeting.
In your meeting, we will show you tax minimization strategies that you can use this very year, based specifically on your unique financial situation.
Schedule Your Analysis Meeting Today and talk to one of wealth managers.
4 Tax Minimization Strategies
1. Aim for Long-Term Capital Gains
As an investor, your goal is to earn a good return on your investments, allowing you to make a profit when you sell an asset. That profit is called capital gains. However, if you sell an asset within one year of its purchase, the capital gains will be taxed at the same rate as your ordinary income. By postponing selling an asset by at least one year, you can benefit from lower capital gains tax rates.
For example, if you are single, and your income is less than $41,675, the long-term capital gains tax rate is 0%.
2. Consider Starting a Business
These days, many people are working from home. If you’re one of them, you may have thought about starting a business from your home. If you’re considering starting a business, you’ll find that there are considerable tax advantages to being a business owner.
You are considered to be a business owner as soon as you start earning a profit from your business activity.
For example, for tax purposes, any expenses that you incur as part of running your business are deductible from your income. If you’re working out of your home, you can deduct the use of your home as a business expense. Such deductions include utilities, homeowner’s insurance, property taxes, and purchases of computer equipment.
3. Maximize Your Retirement and Health Savings Accounts
Take maximum advantage of retirement accounts offered by your employer as a 401(k), or open an Independent Retirement Account (IRA). Your contributions to such savings accounts are tax deductible. You will not pay taxes on your contributions until you begin to make withdrawals, typically when you retire and you fall in a lower tax bracket, which reduces your tax burden.
Similarly, if you open a Health Savings Account, your contributions are not taxed, even when you withdraw funds for medical reasons (there must be qualified expenses).
4. Claim Tax Credits
When it’s time to file a tax return, it’s time to take advantage of tax credits, such as the earned income credit, which can apply to you if your earnings are below a certain level. If you’re considering continuing your education, you will be eligible to a tax credit on your education expenses. There are credits available for when you have a child or other dependents.
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We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
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